Texas Companies Should Update Non-Compete Agreements with California Employees in Light of a New Statute

Any Texas companies that have employees who primarily work and reside in California should update their non-compete agreements with such employees to meet the requirements of theCalifornia Labor Code Section 925. The statute, essentially, forces out-of-state employers to litigate any disputes with their California employees in California courts and apply California law, which prohibits non-compete agreements. Failure to comply with the statute allows employees to sue their company in California to declare their non-compete agreement unenforceable and get their attorney’s fees.

1. To whom does Section 925 apply? It applies to all employers – regardless of where they are based (so, even Texas companies) – that employ individuals who “primarily reside and work in California.” The word “primarily” suggests that the employees must both reside and work in California at least half the time. It applies only to disputes between employers and employees that arise in California.

2. What does the Section 925 say? It states: “An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following: (1) Require the employee to adjudicate outside of California a claim arising in California; (2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.”

3. Is there anything a Texas company can do to avoid the restrictions of Section 925? The statute does not apply where an employee is represented by legal counsel in negotiating the forum selection clause (where any lawsuits will be litigated) or choice of law clause (what law will apply to such future disputes). Section 925 does not apply to any voluntary agreements that are not a “condition of employment” such as, for example, a separation agreement.

4. How does this affect Texas companies’ ability to enforce non-compete agreements against California employees? Prior to Section 925 becoming the law, many out of state employers used choice of law clauses to apply the law of those states that allow non-compete agreements in order to avoid California’s ban on non-compete agreements. Section 925 eliminates this option. Therefore, Texas employers must rely on other protections such as air-tight non-disclosure agreements.

BOTTOM LINE: Texas companies with California employees who primarily reside and work in California should review their policies, handbooks, and employee agreements and make sure that any choice of law and forum selection clauses are compliant with Section 925. As far as negotiating individual employment agreements with key California employees, if Texas companies want for Texas law to govern those agreements (and enforce non-compete restraints) the companies should make sure that the individual employees are represented by counsel in the negotiation process in order to meet Section 925 requirements.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries. If you are a party to a dispute involving a noncompete agreement in Texas, contact Leiza atLeiza.Dolghih@lewisbrisbois.comor (214) 722-7108 or fill out the form below.